Regulation FD

Public companies are beginning to cautiously adopt social media as a disclosure channel. This area has experienced substantial changes lately as the SEC moved from a posture of threatening action against Netflix’s CEO for a post he made on his personal Facebook page to adopting a more relaxed and expansive position. This was really just facing reality given the widespread and growing use and acceptance of social media as a communications mode, but I give the SEC credit for recognizing this and moving to a more reasonable and realistic position.

As mentioned in my prior blog post, the SEC recently gave some preliminary guidance for the use of social media as a disclosure method. This guidance can be found in this SEC Press Release and in the SEC’s report on its investigation of the Facebook postings made by Netflix’s CEO. While the SEC’s actions didn’t pave the way for widespread disclosure by social media, it at least provided some guidance in this area and gave social media disclosure an initial level of validation and credibility. It was good to see this change in the SEC’s position after it initially took a rather harsh stance on the Netflix CEO’s Facebook post (see my prior blog post). It’s early in this process, but I wanted to see how companies of different sizes and from different industries were handling this process. The announcements of first quarter earnings and quarterly results for many companies seemed like a good opportunity to get a progress report.

It appears that public companies are initially taking a cautious approach to using social media as a disclosure channel. The companies that I examined seemed to be testing the waters by either using or referring to social media as a disclosure method while still utilizing more traditional forms of disclosure. This is understandable and prudent. Companies are moving slowly here due to the lack of direct guidance and the significant potential downside if a mistake is made. As I mentioned in my prior blog post, Regulation FD still applies to disclosure even when social media is being used. Many companies hedged their bets by using social media while also using conventional disclosure methods as this significantly reduces the risk of a Regulation FD or other disclosure problem.

The SEC tiptoed into the twenty-first century as the agency validated the use of social media sites in certain situations for disclosure of information by publicly traded companies. This social media disclosure is subject to some constraints, but it is a positive move for public companies, shareholders and potential investors who are social media users.

The SEC demonstrated its resistance to the disclosure of information in a social media post at the end of 2012. As I discussed in a prior blog post, the SEC informed Netflix, Inc. and its CEO, Reed Hastings, that it might institute actions against them for violations of Regulation FD in connection with some information that Mr. Hastings had posted on his personal Facebook page. This Facebook post congratulated a Netflix marketing team for achieving a positive performance metric. The post was short and very specific, and it did not contain any other references or information. Netflix did not issue a press release and did not file a Form 8-K or any other disclosure document at that time regarding the information contained in this Facebook post. The company also did not post any information related to Mr. Hastings’ Facebook post on its website or on its corporate Facebook page.

The SEC alleged that Mr. Hastings’ Facebook post may have violated Regulation FD, which generally requires a company to disclose material information to all investors at the same time, so that no investor is disadvantaged by learning about such information later. At the time of the post, Mr. Hastings had over 200,000 Facebook friends. His post was also picked up and published in blogs and news outlets. Mr. Hastings and Netflix expressed the view that the language contained in Mr. Hastings’ post was not selective disclosure because of the wide distribution of this information both through Mr. Hastings’ Facebook network and the republishing of this information by other social media and news outlets. They also took the position that the information disclosed was not material. Netflix eventually disclosed these events and the possible SEC actions in a Form 8-K filed on December 5, 2012, and Mr. Hastings commented on them on his personal Facebook page.

This is the third part of our Securities Law 101 series. Because capital raising is such a critical function for middle market companies, we designed this series to introduce their management teams to some of the fundamental concepts in securities law. We hope that this series will prevent some of the most common mistakes management teams make. We will periodically publish posts examining different aspects of securities law.

So what is Regulation FD? Adopted by the SEC in 2000, Regulation FD (a/k/a Regulation Fair Disclosure) prohibits companies from selectively disclosing material nonpublic information to analysts, institutional investors, and others. Citing instances of selective disclosure to certain institutional investors and/or securities analysts and the resulting profits or avoidance of loss that come at the expense of those without knowledge of the disclosure, the SEC intended to promote full and fair disclosure of information by issuers.

Under Regulation FD, when an issuer, or person acting on its behalf, discloses material nonpublic information to certain people (in general, securities market professionals and holders of the issuer’s securities who may well trade on the basis of the information), the issuer must publicly disclose that information. Importantly, where a disclosure is intentional, the issuer must simultaneously make public disclosure of the nonpublic material information. However, where the disclosure is non-intentional, the issuer must “promptly” make public disclosure. The required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public such as press releases disseminated by a wire service.

Following up on my post on the subject, I had the chance to speak with Colin O’Keefe of LXBN regarding the SEC sending a Wells notice to Netflix and its CEO over a Facebook post the latter made. In the interview, I explain what happened, why the SEC is displeased and why it needs to do more to make sure its rules and regulations reflect the changing technological landscape.

The use of social media as a public company information channel encountered a roadblock on December 5, 2012 as Netflix, Inc. and its CEO, Reed Hastings, both received Wells notices from the SEC regarding a prior Facebook post that Mr. Hastings had made. A Wells notice is a notification from the SEC that it intends to recommend enforcement action against a company or individual. This notice also gives the affected parties an opportunity to explain why such an action is not appropriate.

Mr. Hastings’ July 2012 Facebook post congratulated the company’s content licensing team for exceeding a milestone in monthly viewing hours. It also contained a positive prediction regarding future monthly viewing hours. Netflix did not issue a Form 8-K, a press release or any other disclosure at the time of this post. Mr. Hastings has made a habit of posting company information on his Facebook page. Here is the post that is the subject of the Wells notice:

Netflix filed a Form 8-K regarding this matter on December 5, 2012. According to this 8-K, the Wells notices indicated that the SEC staff intended to recommend that the SEC institute a cease and desist proceeding and/or bring a civil injunctive action against Netflix and Mr. Hastings for violations of Regulation FD, Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-11 and 13a-15 under the 1934 Act. Mr. Hastings also provided a statement that was attached as an Exhibit to this Form 8-K. The statement clearly indicates his feeling that the SEC’s application of Regulation FD is incorrect here.

Regulation FD prohibits selective disclosure of material information. This regulation was enacted to prevent public companies from selectively releasing material information to certain shareholders or other parties without broad distribution. For example, Regulation FD prevents a company from selectively providing information to certain friendly investment analysts or major shareholders before it is publicly. The policy behind this rule is that all investors should have equal access to material information.

Social media use has experienced a meteoric rise. According to Tweetsmarter (a social media blog), the top five social media sites (Facebook, Twitter, LinkedIn, Google+ and Pinterest) have 1.8 billion users. Many companies have also embraced social media use as a cheap and efficient channel for the dissemination of information. Good examples here include Best Buy’s Facebook page and Whole Foods’ Twitter account.

While social media is a very powerful force in marketing and branding, public companies face significant potential problems from its use. A public company’s posting of information on a social media site is equivalent to any other written information that is disclosed by other means. If material nonpublic information is disclosed via a social media channel, the company will face the same securities law issues that it would face from any other disclosure made through other means. Accordingly, public companies must consider the possible impacts of social media use and take steps to control and mitigate the potential negative effects of social media use.

While there is no perfect solution to the potential problems that social media use creates for public companies, I have assembled the following list of guidelines and best practices for public companies in the social media area:

On September 12, 2012, Apple, Inc. held a highly anticipated conference at which it announced the upcoming release of the latest model of the iPhone. These types of conferences have been part of Apple’s standard operations for many years and seem to be a key element of its marketing strategy. Although attendance is limited to select persons, many Apple enthusiasts are able to keep up-to-date on an almost real-time basis by following any one of the numerous live blogs that usually cover the events. However, the manner in which these conferences are conducted, notably some of the information disclosed during the presentations, may inadvertently run afoul of Regulation FD.

Regulation FD (Fair Disclosure) is an issuer disclosure rule that addresses selective disclosure. The regulation provides that when an issuer, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the issuer’s securities who may well trade on the basis of the information), it must make public disclosure of that information. The timing of the required public disclosure depends on whether the selective disclosure was intentional or non-intentional; for an intentional selective disclosure, the issuer must make public disclosure simultaneously; for a non-intentional disclosure, the issuer must make public disclosure promptly. Under the regulation, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.

As mentioned above, Regulation FD applies to disclosures of “material nonpublic” information about the issuer or its securities. The regulation does not define the terms “material” and “nonpublic,” but relies on existing definitions of these terms established in the case law. Generally speaking, information is material if “there is a substantial Continue Reading Did Apple violate Regulation FD at its iPhone 5 release conference?

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The Securities Edge is published by Gunster’s Securities and Corporate Governance Practice. Our blog focuses on securities law topics of interest to executives of middle market businesses. We try to focus on the most important issues of the day and distill the complex and convoluted into easy to understand blog posts so company executives can get up to speed and move on to what’s really important: running their business.